I think before going into how to calculate payback period, I should tell you a little bit about what is payback period. It is basically the time needed to recover the cost of investments. Payback period is calculated to understand risks, and time it takes to recover the cost of investment and get profits out of it.
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Now to your question, how to calculate payback period. Well, you should know that there is a formula which you can use to calculate it.
Payback Period = Initial investment / Cash flow per year
Let’s take an example:
you have invested Rs 3,00,000 in a residential project. You expect Rs 80,000 in the first year of the residential project, a sum of Rs 70,000 in the second year of the residential project, Rs 65,000 in the third year of the residential project, Rs 50,000 in the fourth year of the residential project, Rs 40,000 in the fifth year of the residential project and Rs 35,000 in the sixth year of the residential project. Initial investment = Rs 3,00,000 Payback period = Years before full recovery + Unrecovered cost at the start of the year / Cash flow during the year You have year 3 which is the last year before the investment turns positive. You have the unrecovered investment at the start of the fourth year, which is the initial investment (Rs 3,00,000) minus the cumulative cash flow at the end of the third year (Rs 2,15,000). Payback Period = 3 + (3,00,000 – 2,15,000) / 50,000 = 1.7 years.
How to calculate discounted payback period?There is a different formula to calculate the discounted payback period, which is:
DPP = y + abs(n) / p
i.e., abs(n) = absolute value of the cumulative discounted cash flow in period y
I hope now you are familiar with
how to calculate payback period. Let me know if you have more questions.
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How to calculate payback period?
Trisha
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3 Year
2022-05-11T05:37:46+00:00 2022-05-11T05:37:47+00:00Comment
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